Ryman Healthcare: Compounder At A Low Historical Valuation

Summary

• Ryman is a great business with low risk of disruption and a growing annuity income stream.
• We discuss how to think about the real estate capital gains, which we believe is more sustainable than the market thinks, as Ryman uniquely guarantees villagers future health care.
• The company is trading below its historical valuation and real estate prices are increasing fast. This provides downside protection.

Ryman Healthcare “RYM” is the largest and most reputable provider of retirement villages in New Zealand.

Founded in 1984 by John Ryder and Kevin Hickman, Ryman raised 25M NZD at IPO in 1999 at a 135M NZD valuation and has since paid out 1B NZD in dividends and grown asset value to 7.7B NZD. Mr. Hickman founded Ryman after being shocked by the conditions he found at an old people’s home when he was investigating a fire as a police officer. Mr. Hickman still owns 7% and another 9% is owned by a Canadian investor/professor with long-term board involvement.

“You could say that we have spent the past 18 years since we listed warming up for the main event – and it is about to begin. I would like to explain why. The clear majority of our residents were born in the 1920s and 1930s, in a period when the birth rate was declining post World War I and into the depression. We are entering a period where the birth rate starts to gradually climb before almost tripling at the height of the baby boom. – Simon Challies, ex-CEO

The hockey stick growth is indeed starting:

Figure 1 80+ population prospect: large acceleration yet to come. From Ryman Healthcare’s AR2020.

In the New Zealand retirement village sector, Ryman is the pioneer of total vertical integration. Ryman plans, designs, constructs, and manages villages. And whereas most operators either build care facilities or independent living units and service flats for aged people, Ryman builds and manages both, co-located on each site.

Figure 2 Footprint from AR2020. Current revenue is split 5/6th NZ - 1/6th AUS. Villages under development about 50/50.

The two types of sector fragmentation: real estate development and management on the one hand, and care beds and independent living on the other, has meant suboptimal customer orientation and sector criticism from time to time. This is especially true in Australia, where Ryman entered Melbourne five years ago.

Ryman is customer oriented with a deep culture of care and the best reputation amongst customers and competitors. It designs and builds villages to own and manage forever. All villages that Ryman builds have the full spectrum of care (resthome, dementia care and hospital).

A typical Ryman village consists of 120 independent living units ‘ILUs’ (townhouses and apartments) ‘ILU’, 80 serviced-apartments, and 200 care beds consisting of 90 hospital beds, 45 dementia beds and 65 resthome rooms. They are all set in a green environment full of gardens and a range of communical facilities such as a gym, swimming pool and a cinema.

Investors regularly ask about the stand-alone economics of certain care beds or decisions to price below industry average. The management points to customer-oriented decision making “Good enough for Mum” and profit following suit. Indeed, as we will see, the business model lends itself well to profit ‘automatically’ if the integrated villages do their job of making the customer happy.

The business has four earnings streams. Management fees - similar to a rent – are paid by ILU and SA residents, care fees are regulated and mostly paid by the government (mostly for care in hospital, dementia, resthome, and to some extent SAs), a development margin on the initial sales of occupancy rights advances ‘ORAs’ for ILUs and SAs, and a resale margin from the price difference of subsequent ORA resale to next generation(s) of villagers.

ORAs are resident deposits in exchange for the right to live in a unit for life. They do not transfer ownership. When the resident vacates the unit (for example, by moving to an on-site care facility, upon death, or moving out of the village), the ORA is returned less the management fee of 4% p.a., which is capped at 20% for life.

Just about all villages have sufficient full spectrum of care, whereas competitors’ care capacity is 2-3x lower on a relative basis and not as complete (e.g. no dementia care). Some village operators outsource care facilities (esp. in Australia).

Through this arrangement, by moving into a Ryman village a resident is assured he will be able to pay for life (life cap), and care capacity will be available in any contingency.

One key metric to track is occupancy: Ryman’s villages run at consistent ~98% levels (sector high 80’s). Also, 81% of Ryman’s care facilities enjoy the highest government “4-year accreditation", compared to an average of 50% for larger operators. The way this accreditation works is that an unannounced government audit will take place and re-certify the care facilities for 1 to 4 years depending on the number of bad findings. If care standards are materially exceeded, 4 years are awarded.

Ryman’s moats are brand and scale. Brand is based on a long and excellent historical track record of offering peace-of-mind and accumulating disparate expertise of developing/managing villages and care facilities. In a sector with accelerating demand, it just needs to avoid messing up to remain largest. Scale means a cost advantage in operations and construction (e.g., re-use of efficient building designs) and HQ functions such as IT (e.g., a 40 MNZD myRyman app to completely replace paperwork and enhance nurse time with villagers (increasing satisfaction on both sides) and care outcomes.

Retirement village model example

Let us walk through the lifecycle of a typical village (and a couple John and Margaret moving in)

1. Ryman constructs a typical village for 100 MUSD all-in costs (land, lifestyle units, care facilities, common facilities), financed by an 80 MUSD construction loan and 20 MUSD equity
   • 200 retirement village houses: 120 independent living units “ILU” villas and 80 serviced apartments “SA”
   • 100 beds of balanced resthome, dementia care and hospital beds
2. Ryman recycles the invested capital by selling the right to live in the lifestyle units for life “occupancy right advance” or “ORA” up to 1.5 year before construction is complete (this reduces developer risk of interim price fluctuations and already shows up in “forward order book”). John and Margaret buy an ORA for an ILU. They know their children will be paid back this nominal face value (minus management fees) when they die
3. John and Margaret move into their brand-new ILU and cash comes in. Ryman’s invested capital is paid back.
   • This shows up as 15-25% development margin in the income statement at the time the resident’s moves in (Realised Fair Value – New Village), but as the village care facilities (about 20% of total village cost) are not sold and instead booked as an asset on the balance sheet, this means Ryman will typically ‘only’ recycle ~100% of total invested cash flow in the village construction. The ILUs and SAs fund all the capital cost of the village
4. In return for the right to live in the village and the management of the village, Ryman charges an annual deferred management fee “DMF” on residents of ILU’s and SA’s. This fee is 4% of the ORA sum and capped at 20% for life. It materializes into cash upon the resident’s exit as it is deducted from the resident’s original ORA sum
5. John’s condition deteriorates because of early-stage dementia. However, Margaret and John had peace-of-mind knowing that if needed John can immediately be moved to one of Ryman’s 40 resthome rooms, while Margaret remains close to him in the ILU villa. This is because they get preferential rights to Ryman’s care facilities as villagers, and not less than 2/3^rd of care beds are occupied by outsiders, assuring villagers of sufficient rooms freeing up at any time
   • Ryman charges the regulated base rent for the resthome room, which is co-paid by the NZ government (typically, the customers’ superannuation pension fund is involved as well)
   • Ryman also gets to charge add-ons for special rooms (most of Ryman’s rooms are special: balcony, large bathroom etc.).
6. As John’s conditions deteriorate, he is seamlessly moved to one of the 20 rooms in dementia care, and later to one of the 40 hospital rooms.
   • The hospital is co-located to dementia care and with moveable beds. This allows Ryman to better manage occupancy fluctuations close to 100%, and more efficient staff rostering

The “regulated+” revenue model for care is similar in all care bed types and shows up in the income statement as “care fees”. Take note in the income statement that the annuity-like care fees from the facilities already 100% cover all corporate costs (with a company in growth mode).

As the government caps care pricing, there is a shortage building in New Zealand for care facilities. Pure care operators’s IRR is too low as they put in a lot of capital on day one to build these facilities. This is a scale business, and we saw Ryman recoups 100% of the total capital cost of a village (including care) from the margin it makes on the ILU’s and SA’s. Scale is also important to enable efficient personnel rostering (demanding and differing schedules across care types) and run closer to 100% occupancy with natural fluctuations.

To the occupancy point, we saw that village residents are insulated from the worrying growing shortage with preferential access to local care. But from Ryman’s point of view, it is a win too as care occupancy becomes more predictable: on average, 30% of care capacity is coming from the “captive” village base, as compared to the less predictable catchment area of a local city.

Ryman’s revenue streams

Let us discuss the IFRS revenue streams in descending order of visibility/quality:

1. Care fees: regulated+ revenues for care facilities. Majority of revenues paid and set by the government.
   • High certainty of demand (needs-based demand), and no non-payments as the NZ government is a co-payer based on customer ability to pay in the first place
2. Management fees “DMF”: accrues annually but cash flows only upon exit. DMF accrues already in the income statement slowly using a conservative assumption: DMF at exit is estimated based on expected stay. This total lifetime revenue (capped at 20%) is then spread over a period which is the greater of the contractual period of DMF cap or the estimated customer tenure
   • High visibility, no non-payments by definition (DMF is withheld from pre-paid ORA)
   • Should the customer decide to leave the village early, the revenue source disappears, but this is often compensated by the fact that short tenures are more profitable (as the DMF cap is not in effect). This is a bit similar dynamic to a pre-payment penalty a bank charges for a mortgage.
3. Realized Fair Value Movement: both from ORA re-sales and new sales. Drivers: median house price evolution, growing demand for villages from secular trend of ageing, construction costs
   • Re-sales: exiting tenant receives ORA-DMF while the new tenant pays a new price based on prevailing interim market price movement (e.g., 20% higher)
   • New sales: Ryman typically realizes development margins of 15-25% on first sales. This is a function of 1) size of development (getting larger over time) 2) interim price movements in housing and construction costs
4. Unrealized Fair Value Movement
5. • An appraisor uses a black box DCF method to mark all units without transactions in the reported period to ‘fair value’. Unrealized fair value gains tend to track latest trends in re-sales prices.

Normalized earnings

Let us first estimate Ryman’s ‘recurring bond yield’ solely based on annuity-like care and management fees. We will layer on the returns to be expected from ORA price appreciation later.

A crude proxy for ‘bond yield’ is 2020 March trailing reported operating income, at about 50 MNZD. Layer-in small exceptional CV-19 opex and interim growth and you get more than 60 MNZD.

This is not the true ‘normalized’ bond yield. The reason is growth costs: consider 40% of Ryman villages to have opened less than 4 years ago (and almost 10% less than 1 year ago): these are not earning steady state yields.

The biggest reason is on the village-level with recent villages: Nobody wants vacancies when shopping (in a mall), working (in a co-working space), or living (in a retirement village). This is why large commercial real estate projects with weak network effects tend to underprice their projects to first-gen tenants to kickstart the network. If you have visited friends who are happy about their multi-year stay, chances are you might want to join them. This is the case for Ryman as well: FCF on the village level (granular data from NZ company register) is actually sometimes stronger for older villages as they have an established (reputation in the) community and word-of-mouth. See below for a financials example of one of Ryman’s oldest villages built in 1994. Note a major refurb occurred in 2014-2017.

Figure 3 Frances Hodgkins village (built in 1994). Author’s sheet based on NZ corporate register filings of individual villages.

The village-level ‘bond yield’ for younger villages is depressed for two reasons:

• Management fees are levied as a fixed % based on ORA prices. And ORA prices for new villages are underpriced for first-gen villagers to kick-start / 100% sell-out the village timely
• Care facilities are loss-making in the first years as (1) occupancy needs to ramp up from 0% and (2) the facilities are subscale as they are completed in phases over 2-3 years alongside the ILU and SA phase completions. There is a reason why subscale care facilities are closing in the countries: the only economic operators have (1) very high occupancy and (2) scaled facilities

I extrapolated mature profitability based on village size onto Ryman’s recent village openings (see scatter plot below) and estimate a 21 MZND of extra mature recurring income. This is based on the maturation of more than 10 villages, some of which are not shown in the scatter plot as they are Australian.

Figure 4 Scatter plot of village level operating (excluding fair value gains) versus opening year. Author compiled data based on NZ company register of individual village financial filings.

Lastly, corporate level opex costs for sales and construction is elevated as Ryman invests in HSD-LDD unit growth. If Ryman were to stop growing, this opex would disappear. I summed all individual village-level opex for NZ and estimate 35 MZND of the total 150 MNZD reported opex sits at the holding level. But some sales and construction opex is actually sitting at the village-level. I think it is fair to assume at least 20 MNZD of opex would disappear if Ryman stopped unit growth.

A round estimate for the normalized no-growth bond yield of the current portfolio is therefore 60 + 20 + 20 = 100 MNZD p.a.

Based on H1 numbers and build guidance I estimate RYM’s gross ORA balance at calendar year end to be 4.0 BNZD. Ryman is earning a normalized bond yield on existing stock of 0.1/4 = 2.5%.

Total shareholder return estimate

How does the long-term nominal ORA price appreciation factor into TSR?

For example, a serviced apartment ORA sells for 100 today and 3 years later sells for 115, Ryman gets to keep 15 (or 4.8% CAGR capital gain ‘cg’ on initial ORA price). This is booked in fair value gains. We should earn the future ORA price CAGR on the outstanding ORAs (~4BNZD).

It gets better, the ‘bond yield’ of 100 MNZD is levied on ORA and hence resets upward as well. Bond yield should compound at the same ‘cg’ rate.

We as investors pay a higher price than the 4 B NZD outstanding ORA’s ‘ORA multiple’. I will calculate this multiple later by adjusting for debt and non-earning assets. This lowers the bond yield for investors today.

This means total investor return without unit growth is:

We find the TSR is levered to ORA price gains.

How does village unit growth factor into TSR?

Ryman uses debt to finance the land bank and construction

Unit growth ‘u’ historically did not require any equity capital as all capital has been recycled at completion thanks to the profitable in-house development activity. So, we can simply add u in TSR.

This means

ORA multiple

My favourite valuation metric to track is ORA multiple (and it works with the TSR formula I proposed). An alternative investor might use is the Market Cap to Fair Value. The problem with this is that ‘fair value’ itself is calculated using a CBRE black-box DCF with many assumptions.

Ryman has had historically consistent low debt levels which have tracked capital in construction well. Therefore, an easy and crude shortcut would be to divide market cap by gross ORA. Today this would yield 1.79X. The advantage is we can easily track valuation over time:

Figure 5 Market Cap to Gross ORA. Note FYE 20 was in the middle of the market rout.

However, to really know how much we pay for the ORA base in place today, we need to adjust the market cap for several items:

1. corporate debt = 2.2 BNZD
2. non-earning assets: the land bank and work-in-progress
   1. undeveloped land bank at historical cost = 0.4B NZD
   2. work-in-progress (land + property) at historical cost = 1.1 B NZD
3. mark the legacy ORA prices to market using the interim real estate appreciation (this will flow through as realized FV gains in the coming years even without future real estate appreciation). Company presentations disclose this as “resales bank” = 1.0 BNZD

Because the company’s development cycle has elongated in recent years due to (1) larger projects and (2) entry in Australia has meant some initial delays in consenting (see subdued build e.g. in 2018), and the good interim real estate market, its fairly safe to mark up the non-earning assets at historical cost by 20% (company has reported higher development margins lately and for the reasoins above I think this will continue for a while).

So we have 7.37 BNZD market cap minus (0.4 + 1.1) x 120% + 1 – 2.2 = 0.6 BNZD.

We pay 6.77 B NZD adjusted market cap for Ryman’s existing base of 4 B NZD ORA value, or an adjusted multiple of 1.69x.

TSR

This yields attractive returns for most plausible scenarios of 8-12% unit growth (historical) and historical price appreciation of ORAs.

However, we are implicitly assuming the real estate market during the development cycle to be as good as in the past (unit growth with complete capital recycling assumption by summing u). It is probably fair to assume development margins will be lower if ORA prices appreciate more slowly. In the table below I present TSR’s for several levels of ORA price appreciation and unit growth after two minor corrections:

1. I assume Ryman needs 15% of new ORA values in invested equity capital if the LT price appreciation would be 0% (this implies a 5% development margin instead of historically 20%). This lowers TSR by 15%*u. I corrected TSR for allother appreciation values as well in the below TSR table.
2. Likewise, as we saw in ‘normalized earnings’, I added back 20 M NZD of opex in case of zero-unit growth. I scale back this add-back for higher unit growth appropriately.

Figure 6 TSR using various long-term assumptions about price appreciation and portfolio unit growth.

Ryman management consistently repeats the aim to achieve 15% profit growth long-term. The math on this should be 2*cg + u = 15%. Using 3% real estate price gains this implies a long-term build rate of 9%. The coming years are expected to be above that (>10%).

Maybe we should assume ORA price appreciation of only 2% given low interest rates as a starting point. At the long-term unit growth guidance this still translates into a TSR of 13%.

New Zealand housing market

Consider that New Zealand’s population has grown at a 1.4% rate in the last 20 years (and faster at 1.6% in the last decade). By building retirement village Ryman helps solve the general housing shortage as well. A few years ago, the government has toughened lending standards and banned foreigners from buying NZ real estate. Many rich Chinese and Americans alike are buying anyway after getting citizenship. New Zealand is an in-demand safe and harmonious society.

Ageing population

In the next 20 years, the 80+ population is set to more than double for both New Zealand and Victoria. Recall Ryman’s average entry age is 79, older than sector average. As opposed to the accelerating 65-80 demographic, the 80+ growth will accelerate for a long time ahead.

There is of course a loose relationship between median house prices and ORA values as residents sell their homes to pay for ORAs. However, the net capital sum freed up from making this move has been growing.

Figure 7 Median House Prices versus ILU and SA Prices.

Later I will show why it is a mistake to use the general real estate market health as a shortcut for independent living units and serviced apartments pricing, especially for Ryman.

Competition

In New Zealand, the “big 6” increasingly dominate the space with almost 60% market share. As number one, Ryman leads with almost 20%.

Figure 8 From: New Zealand Retirement Village White Paper 2019

Figure 9 Competitor offering: many sites with either care or independent living

Ryman’s headline valuation is highest among peers as it is the only player with a true continuum of care across all its villages. Care beds as a percentage of total village units is 33% (and another 20% serviced-apartments) while peers are at 0 – 20%. In fact, all peers have favourable things to say about Ryman’s success with its continuum of care model, e.g., several ThirdBridge interviewees at competitors, and are trying to replicate it, e.g. Summerset Group.

Let us discuss the biggest competitors: Summerset is the closest comp to Ryman, with 20% of units in care, building more expensive and upscale units. Summerset has had success in replicating Ryman’s more balanced model in the last few years. However, it has recently rerated more quickly and is now trading at almost the same market price to ORA multiple. I believe between the more upscale nature, the higher Auckland concentration, less balanced overall portfolio (younger clientele, see discussion later) makes Summerset a more high-risk high reward play.

Metlifecare has 10% of portfolio in care beds and EQT bought it out as it was somewhat mismanaged and grew through M&A. Oceania is in the same boat and a large pure play in care.

In Australia, there are no integrated village players (as opposed to developers of lifestyle villages). Stockland and Aveo develop and manage lifestyle villages. Stockland is a diversified property company and Avea has only recently been making a transition to providing continuum of care in the new villages they build (and recently acquired by Brookfield). Even still, the ownership and management of care facilities in Australia is often a partner company.

I used the wording “headline valuation”, as the typical easy valuation comparison between peers is to look at EV to appraisal fair value. The catch is that the valuation methodology for independent living on the one hand, and care infrastructure on the other is different. Both valuation methods have DCF as an important pillar. However, exactly because the DCF for care beds are not nearly as favorable due to government pricing regulations, they are in short supply in New Zealand. I believe this growing care shortage will spill over in higher Ryman ORA price appreciation gains, as it has done in the past.

A good way to think about the extensive care facilities in Ryman’s villages is that they are cross subsidized by the ILUs and SAs. Now why would that make sense? It turns out there are several FCF benefits for ILUs and SAs by ‘subsidizing’ sufficient care facilities on-site:

1. Quicker recycling of cash flows

1. • integrated villages attract on average older residents, which means a lower average village stay. When the new resident comes in, the accrued deferred management fee “DMF” is released quicker into FCF
2. Higher profitability for ILU’s and SA’s
   • All operators cap their DMF (recall Ryman’s cap is lower at 20% while most are at 30%), the quicker turnover of an older resident’s base (see point 1) means the cap is less often in effect
   • A resident buying an ORA from Ryman is given preference rights to Ryman’s care facilities[3]. Given the increasing shortage of (regulated) care facilities in New Zealand, a resident is willing to pay for the embedded “call option” of a care bed, meaning a sustainable value uplift for Ryman’s ILU’s and SA’s.
3. Resilient FCF growth
   • Attracting older residents with care possibilities mean clients move in as a “needs-based” decision as opposed to a discretionary lifestyle decision. Indeed, Ryman’s average entry age for ILU’s is ~79 (SA ~86) vs mid 70s for the sector. This translates into consistent near-100% occupancy (vs ~87% for the sector) and less volatile ORA values (+- monotonically increasing) over time. For example, Ryman ORA values increased every single year throughout the financial crisis.

The first two improve the FCF while the latter lowers the risk and hence the fair discount rate. Having the best care facilities has a significant effect on the true value of the village ILUs and SAs.

Being the best operator with lower headline pricing and an older, more needs-based clientele, means Ryman’s FCF machine is working in recessions too, allowing it to keep invest e.g. in its landbank when prices are cheap.

Lastly, the fact that retirement villages with full continuum of care cater to an older demographic also means Ryman will benefit the longest from the secular demand acceleration from demographics of +80-year olds (as opposed to the earlier wave of 65-75-year olds).

Is there any way to actually prove these points?

I found that despite Ryman’s industry-leading low DMF pricing (capped at 20% versus many operators at 25-30%), historical free cash flow generation (incl FV gains) compared to ORA value for Ryman is actually the highest in the sector.

This confirms my suspicion that the growing peace-of-mind scarcity premium of moving into a village with continuum-of-care options translates into higher fair value CAGR compared to other operators. I believe it is therefore plausible for Ryman ORA pricing to e.g. compound at 3-4% while the median house price compounds 1-2%.

Another way to say this is that care facilities are an undervalued asset on the balance sheet and management is right to be customer oriented and look at village economics holistically.

CV-19 considerations

The short story is while Ryman’s construction and sales activity were briefly and initially affected by CV-19, I believe Ryman continuum-of-care villages to have a scarcity premium in a new normal where pandemics persist. All facilities an elder person needs are on-site, and not one person has tested positive thanks to measures (and the lower degree of infections in NZ and Australia).

Ryman’s planning was impeccable with in-house medical experts. It took measures in January (faster than the NZ government), e.g., to stock up on PPE and restrict inbound Chinese travel in the villages.

Most of the office staff were sent home and some redeployed to ramp up temporary elevated demand for village services such as grocery deliveries etc. Thanks to the thousands of myRyman tablets rolled out for each care bed over the last years, Ryman immediately deployed Zoom for family calls.

As for the temporary construction and sales disruption, this comes down to two things:

1. Ryman construction activity: this was delayed ~2 months on avg. (less in AUS, more in NZ)
2. Cash coming in from new villagers when/shortly after they move into their unit. A villager typically sells down his/her house simultaneously to pay Ryman. This was hampered as home sale visits were restricted for a brief period in the first wave

To believe the pandemic will affect Ryman’s business model going forward, you would have to believe in future moratoria on construction or the house sales market. Given the prevalence of masks and the fact Ryman operates in one of the safest jurisdictions in the world, I think this is a stretch.

Since the pandemic, Ryman’s overall occupancy has crept up, and the sector has ticked down, one percentage point to respectively 98% and 87%. The company commented that serviced-apartment resales, a needs-based decision, were especially strong (SA make up 30% of RYM’s portfolio of ILUs and SAs, significantly higher than the sector avg.).

While prospects were unable to visit villages during most of H1 2021, the sales team did a great job. Ryman reports resale stock for sale, and this crept up from 1.7% in March to only 1.9% in September (resale stock average of 6 weeks for sale). As the average tenure of a villager is 5 years, this means about 10% of stock is up for sale every 6 months, implying 98% (0.2%/10%) of stock that came up for sale in H1 was sold.

Setting the short-term dent aside, CV-19 might have slowed down the supply growth, but it certainly has not stopped the secular demographic growth of demand (or at least not in AUS/NZ…).

Management

Both board and management are rather long tenure. Current CEO Gordon MacLeod has been with the company for almost 15 years and was prepared for the job as former CFO by former CEO Simon Challies, who had to step down in 2017 because of later stage Alzheimer’s.

The board seems to be strong with various capabilities and entrepreneurs in the medical profession, construction, healthcare, nursing etc.

In general, management seems quite transparent about mistakes, talking about lessons learned on certain projects.

Remuneration is where you want it to be with the CEO at a total of 700 KEUR while he still owns 5.4 MEUR of stock. The company provides interest-free loans to encourage employee share ownership, but employees including the CEO actually pay to buy Ryman stock.

Conclusion

Ryman is a great business with low risk of disruption and a growing annuity income stream. Customers fully fund Ryman’s HSD unit growth. Both unit growth and asset inflation drive Ryman’s growing pre-paid/government-paid untaxed bond yield.

The company reports the ‘underlying profit’ (this still includes realized gains on new sales and re-sales) which is indeed growing rapidly alongside the bond yield we discussed.

Figure 10 Company summary financials. From the 2020 annual report.

We saw that TSR has a levered component to New Zealand real estate appreciation. Leverage cuts both ways, but Ryman is a superior way to invest in NZ real estate (and perhaps the only way, as foreigners were banned from investing in real estate a while ago). It might also offer some alpha on top because of the secular ageing trend.

I feel the required return should be low for this investment, and would comfortably underwrite long-term compounding at 9-16% p.a.

RYM’s valuation is cheaper than it has been in years, limiting short-term de-rating risk: RYM has de-rated on a simple market cap / ORA ratio. Additionally, it has a higher-than-average base of non-earning assets at the moment as the build rate is elevated in the next two years. The wedge between headline profitability and mature profitability is historically on the higher side as well (high growth rate, longer project durations because recent villages are bigger and multi-phase which take longer to mature).

Lastly, general real estate appreciation has accelerated out of the pandemic: median NZ house price is up +15% YoY as of Sept. 2020.

Risks

The main risk is that Ryman retains the ownership and hence price risk of the village units and bears the liability of repaying villagers upon exit. Let us tackle the price and liquidity risk.

We draw from the actual legal terms of ORA’s which are disclosed on a per-village level on the NZ company register of each village.

Price risk: the average tenure is long at 5 years and predictable (ILUs and SAs weighted). Also, we saw that ORA prices tend to move less abruptly, and more monotonically upwards, than the median house. This is the case for several reasons:

1. one cannot buy to speculate (ORA’s stipulate you have to actually live in the unit, you cannot rent it out either)
2. one cannot finance ORA’s with debt (as stated in the contract, and banks will not accept it)
3. the reason to buy an ORA is typically needs-based (and more so for RYM, with higher share of serviced-apartments)
4. buffer with median house prices: customers tend to free up hefty sums when they sell a typical house in Auckland and Melbourne. There is no law that dictates 80-year-old require 300 kNZD in liquid assets when they move into a village where approx. all costs can be paid from the ORA and superannuitation fund

Ryman management can easily anticipate any price issues: even if the price starts dropping tomorrow hypothetically, the pent-up cash flows to be released from embedded historical real estate gains on the current historical ORA bank on the one hand (+35% right now, or 1 BNZD), and the accrued management fees on the other, ensure Ryman’s FCF would grow in the next years (at flat real estate prices) while the company can prepare many years in advance for a multi-year depression by e.g. curtailing construction and changing pricing (e.g. raising DMF cap which is the lowest in the industry). Unless real estate prices permanently drop 40% for a decade, there is no issue.

Liquidity risk: The contract stipulates that RYM is not obliged to repay residents upon exit until a new customer is found, except after 3 years. Ryman is required to start paying interest (somewhat above the interbank rate) if they do not sell to a customer within 6 months. Historically RYM’s stock has been on the market for 3 weeks on average.

Disclosure: I am/we are long RYHTY. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.